Is Victory Nickel (CNSX:NI) Weighed On By Its Debt Load?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Victory Nickel Inc. (CNSX:NI) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Victory Nickel
What Is Victory Nickel's Debt?
As you can see below, at the end of June 2019, Victory Nickel had US$17.2m of debt, up from US$15.8m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Victory Nickel's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Victory Nickel had liabilities of US$20.0m due within 12 months and liabilities of US$1.0k due beyond that. On the other hand, it had cash of US$81.0k and US$89.0k worth of receivables due within a year. So it has liabilities totalling US$19.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$3.33m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Victory Nickel would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Victory Nickel's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Victory Nickel actually shrunk its revenue by 43%, to US$593k. To be frank that doesn't bode well.
Caveat Emptor
Not only did Victory Nickel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$29m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$618k in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Victory Nickel insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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